Morgan Stanley provided a preview of the upcoming central bank policy decisions in Egypt, highlighting a significant decline in inflation for the fifth consecutive month in July, reaching 25.7% year-on-year from 27.5% in June.
This decrease was below both Morgan Stanley's forecast of 26.7% and the Reuters consensus of 26.6%. Despite this, the firm anticipates that the Central Bank of Egypt (CBE) will maintain its current interest rates in the near term due to several factors.
Firstly, although inflation is decreasing faster than expected, it remains above the CBE's target range of 7-9% for the fourth quarter of 2024. Prime Minister Madbouly has expressed a goal to reduce inflation to below 10% by early 2026.
Secondly, recent increases in government-controlled energy prices add uncertainty to the short-term inflation forecast. Fuel prices rose by approximately 15% at the end of July, followed by electricity prices increasing by around 35% for consumers and 77% for industry at the end of August.
Furthermore, under the flexible exchange rate system, which is a crucial aspect of the International Monetary Fund (IMF) program, a tight monetary policy is necessary to maintain foreign investment in local currency assets and to manage speculative foreign exchange demand by locals.
Morgan Stanley has revised its inflation forecast to 23% for December 2024, down from 26%, after considering the lower-than-expected inflation in July and the recent slowdown in the inflation trend. The December 2025 forecast remains at approximately 13%, in light of the government's plans to gradually eliminate expensive subsidies as part of fiscal adjustments.
The Egyptian authorities have pledged to return fuel prices to cost recovery levels by the end of 2025, as per the IMF's third review of the $8 billion Extended Fund Facility (EFF). Although this commitment is more flexible than the original quarterly fuel price indexation, it suggests that energy-related costs will continue to influence inflation into the next year.
Morgan Stanley now predicts a total of 200 basis points in rate cuts in the fourth quarter of 2024, adjusting the timing from the first quarter of 2025. They project a reduction to 25.25% by December 2024 and further cuts totaling 600 basis points to 19.25% by June 2025, as strong base effects are expected to significantly lower inflation in the first quarter of 2025, particularly in February.
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